A lot of fuss is made about the dangers of speculators in commodity markets. But who is a speculator and who isn’t is based on a definition drawn up in the early part of the last century in the United States. The definition is no longer valid and anybody looking at those reports should be wary of drawing any firm conclusions.

For a start the word “speculator” with negative connotations is applied to pension funds, which invest over the long term to provide retirement income for many people around the world. Hedge funds are normally speculators but if they have hold the physical commodity then they can say they are commercial hedgers. Taking this theme a little further many natural resource companies run their Treasuries as profit making centres, which encourages them to trade the commodities they produce.

The London Metal Exchange has said it won’t go down the route the CFTC has and publish a weekly report detailing speculative long and short positions because there is no clear definition.

The CFTC bowing to popular pressure has continued to provide these weekly reports detailing long and short speculative positions, which ultimately could be misleading and make scapegoats of all investors whatever their ilk.

For better or worse, hedge fund returns have a tendency to follow markets, in part because most long-short funds are net long most of the time.

So after a huge rebound in the stockmarket this year, which has helped hedge funds make up some much-needed ground, October proved a difficult month when the market fell in the second half of the month.

After all 2009's growing optimism, investors were suddenly concerned that a withdrawal of government stimulus would harm an economic recovery in its early stages.

So, after a bumper 2008 and a miserable 2009 for short-sellers, it was they who leaped to the fore again in October - dedicated short bias returned 1.61 percent, while long-bias funds lost 0.38 percent and long-short funds were flat.

However, the long bet may not be over for hedge funds. John Paulson, the man who made billions betting on the subprime crisis and profited last year from shorting banks, is going long Cadbury.

With 2.54 percent of the chocolate maker, Paulson's move may show that, despite this year's huge rally, there may be more upside left in some stocks.

The Dow Jones Industrial Average has recouped more than 50 percent of the losses from the October 2007 peak and the March 2009 bottom.

It’s been a remarkable rally, and the cheerleaders of the world’s major economies say it indicates a return of confidence to markets.

They say the world’s market rallies are based on galloping improvements in economic fundamentals, and this just eight months after many of them were predicting the end of the world as we know it.

It won’t have escaped history watchers, and perhaps a few others who need to get out more, that thus far, the rally looks and feels remarkably similar to the bear market rally after the 1929 Wall Street Crash.

It has been a low-volume rally, and a lot of cash is sitting on the sidelines.

Those holding the cash are either looking on enviously, waiting for a big correction in order to buy at lower prices, or they say they will remain in cash, reasoning that the fundamentals underlying the run up are far from solid.

True, corporate earnings are improving, but looking carefully, it is clear most of the improvements have been

achieved via cost cutting, mainly in the form of reducing staff numbers.

Unemployment is up sharply in most major economies, and many of those in work are working fewer hours and taking home less pay. Few, if any workers have even had a sniff of overtime in the past year.

In the U.S, personal saving has risen to 3 percent, and some commentators suggest it could reach 8 to 12 percent within two years as savers try to rebuild an asset base battered by the slump in housing and securities prices.

So in spite of the massive profits at JP Morgan and Goldman Sachs -- none of which, incidentally, came from

lending to businesses or consumers -- many are unconvinced that corporate profitability is on the road to recovery.

Moreover one or two problems still have to work their way through the economy, and through banks balance sheets. Commercial mortgages. Adjustable rate mortgages that are yet to reset. Credit card defaults.

Savvy investors are still trying to get some of the upside from equities, which still appear to be on a tear. They are however positioned cautiously, and ready to turn around their portfolios and flee to cash and gold (and perhaps large supplies of tinned food and a few automatic weapons) at the first sign of trouble.

Because if history is anything to go by, the lows of March were only the first act in this recession.

By Jason Benham

Glitzy Dubai's property market is in trouble, there's no doubt about that. Just take a look at the hundreds of motionless cranes, unfinished projects and the expats who are leaving in droves as they lose their jobs.

And prices and rents which soared during a six-year boom have crashed since late last year. According to one resident who recently moved in the City, it now costs 150,000 dirhams to rent a three-bedroom flat on the Palm, a man-made island off the coast of the emirate, around the same it would have cost to rent a one-bedroom appartment there a year ago.

It's not just the global downturn thats the concern for Dubai's once-booming property market, but also the lack of transparency and need for greater regulation. And that's what's going to keep the western investor from splashing the cash.

Investors looking at Dubai's real estate sector are a different breed. They are no longer looking to snap up properties in the hope of making a quick buck. They are more conservative with a longer term outlook.

"RERA (the Real Estate Regulatory Authority) has been trying to introduce regulation to minimise the impact of speculative investors," said Andrew White, head of Middle East operations at UK-based investor Kenmore property Group.

"But some have said this is like shutting the stable door after the horse has bolted because the downturn has more or less wiped these out anyway." So, a little too late perhaps ? And what about the recently announced planned merger of Emaar Properties, builder of the world's tallest tower, with
three other local property firms?

Well, so far no one really knows. Simply put, there has been little in the way of information about this.

"If you look at Emaar and the potential merger, there is little financial clarity on how this will proceed and that is going to worry investors," said Bobby Sarkar, analyst at Al Mal Capital. "The U.S. and European markets have high levels of clarity in terms of regulation, but that isn't the case here."
 
There is no doubt however that the government is trying to improve regulation and transparency. Several wins for the property market over the last year include the introduction of a monthly rental index and new laws for property maintenance, not to forget the continuing effort to crack down on corruption.

But there is a long way to go and more is needed for Dubai to come close to rivalling mature markets such as the UK and U.S. which offer the longer-term investor the transparency they crave.

Turns out Goldman Sachs is a staunch advocate of going organic -- when it comes to the money management business.

As Barclays auctioned off its Barclays Global Investors unit this year, Goldman was widely seen as a likely acquirer. That is until Blackrock In under Larry Fink emerged as the buyer with a $13.5 billion deal.

Lots of other money managers are expected to be sold, as the industry consolidates and cash-strapped banks look for valuables to pawn. But Viniar told analysts Goldman's preference is to grow the business without deals, and appeared to question the very idea of money manager deals.

"If there were an acquisition that made sense financially for us to do, we would certainly consider it," he said, something he says every three months to calm down excitable analysts. "When we look at the prices of most of the acquisitions, we think that they haven't made sense in that you've had to assume really heroic growth rates that we don't think are realistic." 

Jefferies Putnam Lovell recently said it counted 35 management deals in the second quarter, compared with 52 deals a year earlier. Besides the BGI takeover, Aquiline Capital Partners acquired Conning & Co,  JPMorgan Chase bought the remainder of its Highbridge Capital Management hedge fund unit and Woori Finance purchased Credit Suisse's 30 percent interest in a joint venture.

Yet Viniar notes money management firm deals are tricky, since buyers have to pay a premium for the company and then put up more money to retain star managers. And even as billions of profits come sloshing into Goldman's coffers, Viniar apparently doesn't like to part ways with the firm's cash.

"It has taken a while, but we've grown (the asset management business) quite successfully, almost exclusively organically." he said. "And the high likelihood is that is the way we are going to continue to grow it in the future."

(Photo: A customer walks past organic products in an organic food chain store in Taipei/Pichi Chuang)

More good news for equity bulls from Crispin Odey.

Odey, who called the possible start of the bull market earlier this year, says technically there is "every reason to be hopeful that a major correction will not happen before September".

And, having profited handsomely from his position in Barclays, which is now a 16.3 percent holding in his European fund, he sees the best opportunities in companies that were once unable to refinance but now can get credit, rather than safe-haven stocks.

"I still find myself coming out of meetings with companies whose share price is up fivefold since January and wanting to fill my boots. But it is quite a narrow field.

"This is the year of the prodigal son, with no prizes for being the sensible and good older brother."

(See also Odey's Barclays Boost)

(Follow major developments in the hedge fund industry this week with Hedge Hub's coverage of the GAIM)

Sheltering from the credit crisis in so-called defensive stocks could prove a disappointment to investors and a great opportunity for short-sellers, according to Liontrust hedge fund manager James Inglis-Jones.

Inglis-Jones, who runs a hedge fund for Liontrust and who recently took on the First Income fund after the departure of star manager Jeremy Lang, has short positions in sectors such as tobacco and pharmaceuticals and has recently added more.

"It's an interesting opportunity when something is seen as safe," he told me. "When the company delivers a disappointment the payoff can be pretty good."

In February Hedge Hub reported Crispin Odey saying defensives were becoming "interesting shorts" and that he "certainly wouldn't own them".

However, with markets having bounced so much recently -- the FTSE 100 is up by a quarter since March -- and many defensives having missed out on most of the rally, are defensives still expensive or do they offer better relative value now?

Much of that depends on whether the rally has legs or is a dead cat bounce. Barclays Wealth came out today saying it is "shifting to the tactical offensive", adding, "The big question now is whether the pick-up is temporary or the real thing. We suspect the latter." Several big names have already pointed to a new bull market, but after a 25 percent rally where do we go from here?

It's fashionable now for leading economists and financial wizards to claim that they saw the credit crunch coming and the kind of dislocation it would create. But how many have predicted where the next implosion will occur?

Dr Andrew Lo, founder of hedge fund firm AlphaSimplex, and director of the MIT laboratory for financial engineering, has spent his career studying market behaviour, publishing papers examining why quant funds imploded in August 2007, and trying to reconcile behavioural economics with efficient market theory.

He sees the next big meltdown in commercial mortgages, but this time it's pensions funds that will bear the brunt of the losses rather than banks. Lo points out that commercial mortgages have been packed and sold in the same way as residential mortgages - different levels of risk exposure sliced and diced and wrapped up together in one package with a triple A rating slapped on top.

But commercial mortgage backed securities (CMBS) are facing the same liquidity problems as RMBS following the sub-prime meltdown. When mortgages start to reset at higher rates this year the defaults will pile up and the losses will hit the end-investor - in this case, large pension funds in the US, Europe and Japan, says Lo.

"We are likely to see a number of pension funds having a hard time meeting their liabilities, and the government may have to step in and help out some of these insolvent funds," he says.

Why pension funds rather than banks, which had the greatest exposure to RMBS?

Lo says that large pension funds expanded their programmes into riskier areas like CMBS to capture additional yield during the low volatility, low return years.

Lo is now trying to develop a way to measure systemic risk, so regulators have an early warning system when the global economy starts nudging critical levels. The idea is to measure the gearing in the economy and how this compares to the level of activity by looking at factors like the notional exposure in the credit markets, public debt as a ratio to GDP, inflation and money supply.

"My hope is that within the next couple of years we will have a way to measure systemic risk and we'll be able to control it like we can with pollution," he said. He suggests one way to do this would be to "tax" investment banks when they start to put the financial system under too much strain, so their behaviour becomes counter-cyclical.

Giampaolo was speaking today at the London leg of the Reuters Hedge Fund and Private Equity Summit.

McLean was speaking today at London leg of the Reuters Hedge Fund and Private Equity Summit.